E 14-16 Error in amortization schedule

Wilkins Food Products, Inc. acquired a packaging machine from Lawrence Specialists Corporation. Lawrence completed construction of the machine on January 1, 2009. In payment for the machine Wilkins issued a three-year installment note to be paid in three equal payments at the end of each year. The payments include interest at the rate of 10%.

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Lawrence made a conceptual error in preparing the amortization schedule, which Wilkins failed to discover until 2011. The error had caused Wilkins to understate interest expense by 45,000 in 2009 and 40,000 in 2010.

Required:

1. Determine which accounts are incorrect as a result of these errors at January 1, 2011, before adjustments. Explain your answer. (Ignore income taxes)

2. Prepare a journal entry to correct the error.

3. What other step(s) would be taken in connection with the error.

E 14-18 Installment note; amortization schedule

American Food Services, Inc. acquired a packaging machine from Barton and Barton Corporation. Barton and Barton completed construction of the machine on January 1, 2011. In payment for the 4 million machine, American Food Services issued a four-year installment note to be paid in four equal monthly payments at the end of each month. The payments include interest at the rate of 12%.

Required:

1. Prepare the journal entry for American Food Services’ purchase of the machine on January 1, 2011.

2. Prepare an amortization schedule for the four-year term of the installment note.

3. Prepare the journal entry for the first installment payment on December 31, 2011.

4. Prepare the journal entry for the third installment payment on December 31, 2011.

P 14-21 Report bonds at fair value; quarterly reporting

Appling Enterprises issued 8% bonds with a face amount of 400,000 on January 1, 2011. The bonds sold for 331,364 and mature in 2030 (20 years). For bonds of similar risk and maturity the market yield was 10%. Interest is paid semiannually on June 30 and December 31. Appling determines interest expense at the effective rate. Appling elected the option to report these bonds at their fair value. The fair values of the bonds at the end of each quarter during 2011 as determined by their market values in the over-the- counter market were the following:

March 31 $350,000

June 30 340,000

September 30 335,000

December 31 342,000

Required:

1. By how much will Appling’s earnings be increased or decreased by the bon ds (ignoring taxes) in the March 31 quarterly financial statements?

2. By how much will Appling’s earnings be increased or decreased by the bonds (ignoring taxes) in the June 30 quarterly financial statements?

3. By how much will Appling’s earnings be increased or decreased by the bonds (ignoring taxes) in the September 30 quarterly financial statements?

4. By how much will Appling’s earnings be increased or decreased by the bonds (ignoring taxes) in the December 31 annual financial statements?

P 15-3 Direct financing and sales-type lease; lessee and lessor

Rand Medical manufactures lithotripters. Lithotripsy uses shock waves instead of surgery to eliminate kidney stones. Physicians’ Leasing purchased a lithotripter from Rand for 2,000,000 and leased it to Mid-South Urologists Group, Inc. on January 1, 2011.

Lease Description

Quarterly lease payments $130,516-beginning of each period

Lease term 5 years (20 quarters)

No residual value; no BPO

Economic life of lithotripter 5 years

Implicit interest rate and lessee’s incremental borrowing rate 12 %

Fair Value of asset $2,000,000

Collectively of the lease payments is reasonably assured, and there are no lessor costs yet to be incurred.

Required:

1. How should this lease be classified by Mid-South Urologist Group and by Physicians’ Leasing?

2. Prepare appropriate entries for both Mid –South Urologist Group and Physicians’ Leasing from the inception of the lease through the second rental on April 1, 2011. Depreciation is recorded at the end of each fiscal year (December 31).

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